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Eight Questions: James McGregor, ‘No Ancient Wisdom, No Followers’

The problem with most business books on China is that they’re out of date almost as soon as they reach the printer. The country’s economy moves at warp speed, defying attempts to offer timeless advice.

Prospecta Press

That may help explain why journalist-turned-businessman James McGregor has issued his latest book, “No Ancient Wisdom, No Followers,” first in e-book format. It’s written as a warning in real time about the perils of what Mr. McGregor calls “Authoritarian Capitalism,” a rapidly morphing system in which gigantic Chinese state companies, directed by the Communist Party, are wresting control of the domestic economy and challenging the global trading system.

Mr. McGregor’s best-selling first book, “One Billion Customers,” was filled with corporate war stories, including his own pitched battle — while running Dow Jones in China — with the Xinhua News Agency, which then lorded it over foreign news organizations as both regulator and competitor.

But the message of “One Billion Customers” was essentially optimistic: With guts and guile, the Chinese system could be navigated. Mr. McGregor was the astute Old China Hand guide.

The big takeaway from “No Ancient Wisdom, No Followers” is far bleaker. The title derives from a Tang dynasty saying that captures the idea of losing one’s way in uncharted territory. According to Mr. McGregor, that’s the treacherous situation that China has created for itself, and the global economy.

I’m referring to the 117 huge central SOEs [state-owned enterprises], many of them monopolies. If you really look at it, the system has evolved in the past decade so that the party controls these SOEs more than the government does. The Central Organization Department of the party appoints the top leaders and they outrank the bureaucrats who are nominally supposed to be the SOEs’ regulators. The party is also able to use the SOEs for preserving political power as much as for building the economy. That’s the heart of the Authoritarian Capitalist system in China today.

You’ve dug deep into original Chinese sources for this book. What’s the core finding?

How much the Chinese economy has transformed since China joined the WTO in 2001. It was headed toward a more free market economy with more private companies. But the country has strongly reversed course to building up state-owned enterprise that is increasingly incompatible with global trade regimes and threatening to multinationals

When did this backward lurch begin?

There were three steps. They saw the Russian oligarchs taking over state assets as private individuals — and the party decided it would be the oligarchy. And so in 2003 they formed SASAC [State-owned Assets Supervision and Administration Commission] to bring the state shares under central control. Then in 2006 there was a directive that took about two dozen key industrial and technology sectors and made them fully state controlled or majority state controlled. Finally, you have the global financial crisis and the 600-billion-dollar stimulus program. That money flushed into SOEs — and they were off and running.

The World Bank, among others, thinks China should start dismantling SOE monopolies. How do you rate the chances of that happening?

You have so many vested interests that are threatened by change. [But] I’m optimistic because I don’t think they have any choice, because the current economic model is running out.

A lot of people have questioned whether the party has the political backbone to take on vested interests.

The Communist Party is a survivor: They’ve shown great flexibility in the past. SOEs add zero growth — zero job growth, zero innovation. The private sector is what Deng [Xiaoping] used to pull this country out of a hole and they’re going to have to use the private sector to move it to the next step.

If SOEs are doomed, why should we be so worried?

Are SOEs ultimately going to be the new General Electrics in 10 or 20 years? I don’t see that happening. But they can destroy a lot of companies and distort global markets and business practices along the way.

Where does the private sector go from here?

The private sector is blocked from core sectors of technology and industry and transportation and banking. Entrepreneurs are unable to get financing so they often live off loan sharks. The good news in China is that you don’t have to direct people – you just give business people a signal and then they run with it. Entrepreneurs here are risk takers who move very fast if given half an opportunity. As for those who are already wealthy, they’re sick of playing the system. China needs those people to lead their “Going Out” policy [of overseas investment]. It can’t be led by SOEs: They’re not China’s best and brightest.

You seem to take this threat almost personally. Why?

I’ve been in China for 25 years. I was chairman of the American Chamber of Commerce and on that board for nearly a decade. I lobbied in Washington for free trade and fair China policies. But I see China going in a direction that the West didn’t think China was going in. I see growing antagonism that’s going to lead to conflict between the U.S. and China and others. And I see nobody speaking honestly because everybody’s scared of China. It’s all about money. So I wanted to put the facts out on the table. I like China and the U.S. and I want to see these countries get along and I’m invested in it. So I thought it was time for somebody to dig deeply into the facts and tell the truth.